Fiscal Cliff vs. Fiscal Bump? Post-Election Views

Two basic cut-out-and-keep-perspectives

Taken near Dead Horse Point and Canyonlands National Park, Utah; source  [Creative Commons]



The glass-half-full version:

Negotiations succeed in securing a temporary extension of expiring tax provisions and spending cuts.

This is the ‘kicking-the-cliff-down-the-road-for-a-few-months’ scenario.

In that world, a short-term debt ceiling increase will have to be agreed, to get the economy to the Spring, when the real work of a deal on fiscal policy would begin.

This would require that the economy be definitively in recovery mode [arguable, but go with it for now please] and despite the prospect of market uncertainty, balance of risks to US growth projections for 2013 would be tilted upside.

Extreme outcomes feared by many today in a worst-case scenario Cliff would thus be moderated to a reasonable extent, at least. [But even in this brighter world, the Cliff doesn’t disappear; it’s just delayed for the medium term.]

The bear version:

Election results for The House of Representatives and [one third of] the Senate show that the balance of power in Washington DC post-election looks suspiciously like it did before.

The government is still regarded as divided in this world. In fact, arguably, the new House and new Senate are more polarized than before – in this more negative view, with fewer moderates all round; more right-wing right-wingers and more left-wing left-wingers.

In that world, fiscal cliff negotiations become another grown-up game of chicken, basically, in the same way the debt ceiling negotiations did.

House Republicans would probably oppose any kind of tax increase – but many commentators expect them to eventually agree to an end of the ‘payroll tax’ break.

It’s the ‘Bush tax’ cuts which would probably cause the most fireworks.

Republicans would not agree to those ending easily, if at all, even if automatic spending cuts are likely to be delayed until 2014 and maybe beyond.

All this might unsettle financial markets in November and December and put downward pressure on US Treasury yields, even if some sort of fudge is the likeliest eventual outcome as various final deadlines [late in the Spring] loom.

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